Since Marissa Mayer’s appointment as the CEO of Yahoo, the market has been waiting for big news from the company. And it seems that Yahoo has delivered. The company has been building its capabilities through talent acquisitions. But yesterday they made big news by announcing the $1.1 billion acquisition of microblogging platform, Tumblr.

Tumblr may have a big user base, but that does not translate to big revenues. They are still trying to establish a strong monetization strategy. Till 2012, Tumblr was trying to generate revenues by offering a premium subscription for $9-$49 depending on the design themes the user chose. Unfortunately, the subscription model was not generating much revenue, and after resisting the ad model, in 2012 Tumblr had to begin rolling out ads.

They began by offering Highlighted Posts for a price of $2 each, wherein users could choose to let certain posts be highlighted with a red label. Soon they upgraded to services like Pinned Posts at $5 each, where users can choose to have some of their posts be present at the top of their followers’ dashboards for a day. They also began offering other services such as an analytics tool at a monthly subscription of $500.

Despite such a weak revenue history, Tumblr’s valuation has been growing. They have raised $125 million in funding from investors that include Spark Capital, Union Square Ventures, John Borthwick, Albert Wenger, Fred Seibert, Sequoia Capital, Greylock Partners, Insight Venture Partners, CrunchFund and DFJ Growth. Their latest round of funding in 2011 helped them raise $85 million at a valuation of $800 million.

Yahoo’s Acquisition
I continue to be puzzled by high valuations for companies that have yet to establish a sustainable business model. Yahoo, though, seems to believe that Tumble deserved a super-high valuation of $1.1 billion and that Tumblr will begin to contribute to Yahoo’s revenues by 2014. At what level is a huge question mark.

Yahoo also plans to focus on increasing Tumblr’s ad revenues. Unfortunately, though, that move is not going down well with Tumblr’s user community. Tumblr’s community is worried that after the acquisition, Yahoo will bombard their site with advertisements. Yahoo has tried to calm the community by assuring them that Tumblr will continue to operate as they are and they will only place ads that are “meaningful … to the user experience.”

But that is not believable. Yahoo did not just spend more than a billion dollars to run a nonprofit. They will have to monetize, or else Mayer will just be another in the line of Yahoo’s revolving door of CEOs.

The Internet, as I have often said, is a colossal free-rider problem in action. Everyone wants everything free.